Why the cost of investing is falling

The cost of investing is falling. Ten years ago, if you had wanted to invest in a fund tracking the UK stock market, it would have cost you 1% of the value of your investment every year. Today, you can invest in a similar fund for not much more than a 20th of that: Fidelity has cut the cost of its UK tracker to 0.07%.

But it isn’t just in the world of trackers that we are seeing huge progress. Many investment trusts have cut their management fees in the last year: neither directors nor investors consider a fee over 1% to be acceptable any more.

Better still, the Retail Distribution Review (RDR), which banned commission kickbacks and made the fees of all other funds transparent, has begun to cut fees across the board.

Neil Woodford’s new fund will cost its investors a mere 0.6% if they buy via Hargreaves Lansdown (note that platform fees bring the total cost to 1.05%).

But just because fund costs are falling, doesn’t mean we all end up paying less. For starters, says Richard Evans in The Sunday Telegraph, many of those who put their money into funds pre-RDR will still be paying the old charges – which include commission payments to advisers for ongoing advice.

If you are getting that ongoing advice and you understand what it costs, maybe that’s fine. But if you aren’t or you don’t, what do you do?

You can ask your adviser to switch your funds into the new ‘clean’ share classes that don’t pay commissions. Or if it is time for a portfolio review, you might switch into new funds – in which case you will automatically get the cheaper clean share classes.

The other group that might want to take action are those who have invested directly with the big fund managers. One of our readers, Neil Jeffares, writes about this on his blog.

He holds one tracker fund directly with a provider that costs him 0.82%. If he used a platform, the same fund would cost a mere 0.15%. The total cost to investors of holding their funds directly rather than on a platform, says Evans, comes to some £100m a year.

The obvious response is to sell and switch. If only it were so easy. As Jeffares points out, not all funds have low-cost share classes investors can switch to. And if you have been holding your funds for some years outside an individual savings account (Isa) or self-invested personal pension (Sipp), you won’t want to sell and buy a different fund – regardless of how much cheaper it is. Why? Capital gains tax.

The impact of this on the investments makes long-term investors today “hostage to the predatory pricing of the manager”. That’s a problem to which I am afraid there is currently no solution.